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Civil unrest and the implications for international franchising

In the case of Flying Music Company Ltd v Theater Entertainment, the High Court ruled that a contract to put on a series of theatrical performances in Greece had not been frustrated by civil unrest in that country.

This was because the civil unrest had begun before the contract was formed and both parties were aware of the risks posed by the already existing civil unrest which had continued but had not got worse. In this article we consider the case and the implications of circumstances such as these on international franchising arrangements in an increasingly turbulent international arena.

Facts of the case

Theater Entertainment, a theatrical promoter based in Greece, and Flying Music, a theatrical producer, entered into a contract under which Theater Entertainment agreed to stage a series of theatrical performances of Michael Jackson's "Thriller Live" in Greece in June 2010. The contract was signed on 21 May 2010 although ticket sales and marketing began before the contract was concluded.

The period of May to June 2010 was a period of civil unrest and disturbance because of austerity measures imposed on Greece in return for support from the European Union and the International Monetary Fund. The civil unrest and the issue of poor ticket sales were referred to in correspondence between the parties before the contract was signed.

The contract required Theater Entertainment to pay Flying Music a fee by instalments and provided that Flying Music was entitled not to perform in the event of non-payment. The first performances were cancelled because Theater Entertainment did not make all of its payments and the last week's performances did not go ahead as a result of poor ticket sales. Theater Entertainment continued to be in arrears on its contractual payments. Following the conclusion of a guarantee between the parties, the remaining performances took place but fees under the contract remained outstanding.

In the proceedings that took place before the High Court, Theater Entertainment argued that it was discharged from its contractual obligations that remained outstanding because the contract had been frustrated by civil unrest. The High Court considered a number of other issues in the case but these are beyond the scope of this article.

Decision of the High Court

The doctrine of frustration recognises the situation in which, without default by either party, an event occurs after the contract was formed which renders performance of a contractual obligation radically different from what was reasonably contemplated by the contract. In addition, in order for the contract to be frustrated, it must not make provision for such an event through, for example a force majeure clause (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696).

In the present case, the High Court was not persuaded that the contract had been frustrated as there was already unrest in Greece when the contract was signed and it was not clear how long it would last. Road closures and demonstrations had already been occurring and ticket sales had already begun and were below expectations.

The situation in Greece did not improve when the contract was signed but the fact that the state of affairs continued, did not mean that the situation had got worse. No new event had occurred after the contract had been signed which would render the parties' contractual obligations impossible to perform or radically different from what was intended. Correspondence between the parties showed that the civil unrest had begun before the contract was concluded and that both parties contemplated that ticket sales would be affected.

The High Court further held that the parties already knew enough about the risks that the existing civil unrest posed to the success of the theatrical production, when the contract was signed. It would therefore not be correct to use the benefit of hindsight to re-allocate those risks by releasing Theater Entertainment from its contractual obligations.

Comment

Frustration is an argument a party uses when an external event has a significant effect on a contract so as to alter the bargain between the parties and make performance of the contractual obligations more burdensome, less profitable or both. When franchising internationally, if the parties were previously aware of civil unrest and this recommences or continues to occur after signature, it appears to be unlikely that the franchisee will be relieved from its obligations to commence the franchise and to pay franchise fees. Franchisors are advised, however, to consider what impact any previous civil unrest might have on future performance of the franchise agreement by both the franchisee and the franchisor and make provision for this in the agreement.

If supplies of goods are to be made by the franchisee to the franchisor, the franchisor should ensure that the franchise agreement and its supply terms contain a force majeure clause.  This should be drafted so as to clearly relieve the franchisor from liability for failure to supply due to circumstances such as civil unrest.

Whilst neither party may be able to frustrate the contract, from a practical perspective it will be necessary to monitor the situation. If it becomes impossible to supply the goods necessary to operate the franchise, then at some point (for example after six months), the franchisor will want to be in a position to terminate the franchise agreement.

Similarly, if the franchisee cannot realistically operate the franchise for the foreseeable future, it may be necessary to terminate the franchise agreement for cause. Certainly, when franchising in any territories where there are known risks the franchisor should consider a range of possible outcomes and ensure that the franchise agreement contains adequate protection. This includes clearly articulating what happens on termination due to circumstances such as these, particularly with regard to monies already paid by the franchisee, and any further payments which might be due.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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